Input tax credit reversal and penalty require proper factual basis; cancellation of seller registration alone is insufficient.

Input tax credit could not be reversed against a purchasing dealer merely because the selling dealer's registration had been cancelled or because the other end dealers had not reported turnover, where the purchaser had dealt with registered sellers and the record lacked a proper factual basis or reasoned consideration for invoking the provisions. Penalty under section 27(4) was also unwarranted in the absence of any finding of escapement of taxable turnover, particularly where the returns based on books of account were accepted. The assessment orders were set aside and the matters remitted for fresh consideration with directions to pass a reasoned order after considering the assessee's objections and relied-upon authorities.

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Issues: (i) Whether input tax credit could be reversed under section 19(15) on the ground that the selling dealers' registration certificates had been cancelled; (ii) Whether input tax credit could be reversed under section 27(2) on the ground that the other end dealers had not reported sales turnover; (iii) Whether penalty could be levied under section 27(4) in the absence of escapement of taxable turnover.

Issue (i): Whether input tax credit could be reversed under section 19(15) on the ground that the selling dealers' registration certificates had been cancelled.

Analysis: Reversal of input tax credit was held to be impermissible where the purchasing dealer had dealt with registered sellers and had complied with the statutory requirements for availing credit. Cancellation of the seller's registration, by itself, was not treated as a valid basis to fasten the seller's default on the purchaser. The governing approach recognised that the purchasing dealer's entitlement could not be defeated merely because the revenue had proceeded or failed to proceed against the seller.

Conclusion: The issue was decided in favour of the assessee and against reversal of input tax credit under section 19(15).

Issue (ii): Whether input tax credit could be reversed under section 27(2) on the ground that the other end dealers had not reported sales turnover.

Analysis: The impugned orders did not contain any real discussion showing why this ground was attracted, nor was there material to justify the proposal in the show cause notices. A reversal could not be sustained on a bare allegation without application of mind to the objections and the factual foundation for invoking the provision. The absence of a reasoned examination rendered the proposal unsustainable.

Conclusion: The issue was decided in favour of the assessee and against reversal of input tax credit under section 27(2).

Issue (iii): Whether penalty could be levied under section 27(4) in the absence of escapement of taxable turnover.

Analysis: Penalty was found to be unwarranted because there was no allegation or finding of escapement of taxable turnover. When the returns based on books of account were accepted, the foundational requirement for levy of penalty was absent. Penalty could not be imposed merely as a consequence of the disputed reassessment proposals.

Conclusion: The issue was decided in favour of the assessee and against levy of penalty under section 27(4).

Final Conclusion: The assessment orders were set aside and the matters were remitted for fresh consideration with a direction to pass a reasoned order after considering the objections and the authorities relied upon by the assessee.

Ratio Decidendi: Input tax credit cannot be reversed against a purchasing dealer merely because the selling dealer's registration is cancelled or the selling dealer fails to report turnover, and penalty cannot be levied without a finding of escapement of taxable turnover.

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